Material Management Essay

1251 Words6 Pages
Case Presentation 1) What is the stated objective of the hedging program, and what should be the objective according to you? (10 Marks) Hedging program was dedicated to ensure that American Barrick was protected against the falls in the prices of gold over the long term. Hedging against the risks can protect the downside of gold price, enabling both the shareholders and investors to share the price premium, the high operation leverage and high sunk costs, limit the ability to adjust production and lock-in the low total costs. Other gold mines owners: Hedge nothing against the price drop risk of gold output. American Barrick Resources Corporation’s hedge position had allowed it to profit handsomely and to sell its commodity output at prices well above market rates. Hedging program evolved out of the conservative financing orientation of the firm. Homestake : * No risk management activities * Shareholders may capture full benefit of increase in gold prices * It will not hedge its gold production * So earnings of shareholders will be more volatile. American Barrick: Managing gold price risk was an integral part of business * It protects shareholders from the impact of dips in gold prices * So they can plan their cash flows with confidence * With their rising production they can offer investors and shareholders a predictable rising earnings profile As Barrick’s reserves and financial strength improved and the market for hedging matured, The company’s risk management activities grew in size and complexity It moved from * Gold financings * To forwards * To options * To SDCs Hedging program was designed to ensure protection against price declines in the long run. In the short run positions were managed to capitalize on expected price movements. The program will help Barrick to increase value of customers

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